Malawi Kwacha floatation: To continue or to discontinue, who will have the last laugh?

Proponents for continued floatation of the Kwacha are her Excellency President Joyce Banda, advised by the Reserve Bank of Malawi (RBM) and supported – in no small way – by the Malawi Confederation of Chambers of Commerce and Industry (MCCCI). Please note that her Excellency President Joyce Banda has never claimed – at any fora – to be a guru in economics or monetary issues.

Her government’s (floatation) policy is an attempt to adhere to and retain a renegotiated three-year Extended Credit Facility (ECF) arrangement for Malawi in the total amount of SDR 104.1 million (about US$156.2 million) approved on July 23, 2012.

Making the case against floatation of the Kwacha are the consumers, and in a way the tax payers, who have in the past borne the brunt and continue to suffer from policies which have never hurt their creators and proponents.

A consumer, as defined by the Consumers Association of Malawi (CAMA) is “an ordinary individual, the final user of goods and services, the one who goes into a shop and realises that he or she cannot afford the very same basic commodities he used to afford nine months ago.”

Malawi leader Joyce Banda

The Context in which the ECF was approved:

Way back in July, 2012, following the Board’s discussion of Malawi, Naoyuki Shinohara, Deputy Managing Director and Acting Chair, issued the following statement:

“Malawi’s new administration moved swiftly to devalue the kwacha, adopt a flexibleexchange rate regime and liberalize current account transactions to address the country’s chronic balance of payment problems and improve the outlook for poverty reduction and growth.

“The new ECF arrangement provides support for the authorities’ medium-term economic program based on Malawi’s second Growth and Development Strategy (MGDS II). Specific objectives of the program include macroeconomic stability with low inflation, increasing international reserves to provide a buffer against external shocks, and reforms to improve the investment climate and promote sustained inclusive growth.

Malawi Minister of Finance and an IMF Official Tsikata – sealing the deal

“The authorities have adopted a prudent fiscal stance in the 2012/13 budget. Higher donor support and a sizeable domestic revenue effort allow the government to increase total spending slightly without recourse to domestic borrowing. Tight control over non-priority spending will be needed to ensure that expenditures are aligned with the government’s priorities, including scaled up spending on social protection programs to mitigate the impact of adjustment measures on the poor.

“In order to achieve fiscal sustainability, the program includes measures to enhance domestic revenue mobilization and public financial management reforms to strengthen the budget process and avoid the accumulation of arrears.

“Monetary policy will be geared to achieving price stability, while providing room for sufficient credit to the private sector and supporting a build-up of international reserves. Reforms will include measures to increase the operational independence of the RBM. The RBM will continue to strengthen its monitoring and surveillance of the financial system.

“The program supports the authorities’ multifaceted approach to promoting growth, including measures to deepen the financial system and to enhance Malawi’s international competitiveness by addressing key supply-side bottlenecks in energy and transport infrastructure,” Mr. Shinohara added.

The stance of the Malawi Govt:

In a radio programme in which she responded to some questions from the general public, President Banda said it was necessary to both

1. devalue the kwacha and
2. float it;

in order to heal the economy and she stressed government would not fix the currency rate as had been demanded by some quarters.

Ken Lipenga – Minister of Finance

“All I can say is that we have to persevere. We are about to get over this difficult phase. We can’t fix the kwacha again because that would create problems,” said Banda.

In a statement released on 31 December 2012, to reiterate the president’s message, Minister of Finance Ken Lipenga said if the devaluation and floatation of the kwacha were not undertaken along with the other reform measures, acute fuel and foreign exchange scarcity and lack of credit lines for industrial producers would have continued to ravage the economy.

“The government is determined to stay the course because this is the only way to improve the lives of all Malawians in a sustainable manner,” said Lipenga.

The RBM and MCCCI:

Governor of the Reserve Bank of Malawi Charles Chuka speaking on state-run Malawi Broadcasting Corporation said that fixing the kwacha was not an optionbecause that could lead to Malawi getting off track with its IMF programme.

Said Chuka: “Any attempt to abandon this exchange rate system will make matters worse. The market-determined exchange rate is the best for Malawi.”

Charles Chuka – RBM Governor

Chuka was speaking at a news conference at the RBM headquarters in the capital city when he issued an end-of-year statement which also provided a general outlook for 2013 regarding monetary policy implementation.

RBM devalued the local unit by 49 percent on May 7 last year and also announced the floatation of the local currency. Since the announcement, there have been calls by market analysts and other commentators for government to reverse the decision, which they argue has triggered a high and unbearable cost of living.

Floatation critics also argue the decision was ill-timed, saying it was not backed by enough foreign reserves. But Chuka said the central bank is comfortable with the current exchange rate system which Malawi is following. He said the system has already seen the kwacha fairly stabilising in recent weeks.

“If a currency is free-floating, it’s a guarantee that you will find dollars on the market…I pray that this system is to stay for Malawi,” said Chuka.

He recalled that in 1994, Malawi ‘auctioned’ the kwacha and the currency shed its value from K4 to K8 to a dollar in a week before losing its value further to K18 after five weeks.

Chuka said during the same period, inflation rose to 91 percent and that interest rates soared to as high as 46 percent.

“After that period, inflation fell sharply to 9 percent and foreign reserves were built up. People should not forget that this is not the worst,” said the RBM governor.

Chuka also hoped that in 2013, inflation, currently at 33.3 percent, will likely average 18.4 percent and that most indicators will stabilise.

In an interview later, Malawi Confederation of Chambers of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira noted that most of the reforms that government is implementing are bearing fruit, saying the kwacha has already shown signs of stabilising.

(MCCCI) chief executive officer Chancellor Kaferapanjira

“This is a result, no doubt, of strict monetary policy which moved quickly to remove excess liquidity from the market,” said Kaferapanjira.

He also said foreign exchange is also available,‘again sometimes sporadically’, but stressed that most factories are now running.

The Catch 22:

Despite all these assuring messages from the Malawi Government and its institutions, nothing so far has been seen by the ordinary man and woman, the consumers so to say.

Consumers know from experience that the Minister of Finance and Reserve Bank of Malawi authorities have in the past sang praises for the very policies that have led to the current situation.

These institutions, to support the fickle ground they and their masters stand on, will go to the extent of cooking up figures to justify doomed policies.

This leaves the MCCCI as the more “independent”, or rather the lesser of the two evils. But again the MCCCI, in the eyes of the consumers, comes with a problem.

The industry, no matter the effect government’s policies create, never suffers the cost. The cost of misguided policies is borne by the consumer; who has still has little or no choice but to:

1) buy goods and services from this very same exploitive industry and;

2) pay exorbitant taxes (direct and indirect) to ensure that her Excellency President Joyce Banda and government officials including those at the Reserve Bank of Malawi (RBM) are paid handsomel, can travel at a whim – in short, have lots of money to spend without being accountable to anyone.

If their policies succeed, the consumers should be thankful to have them at the helm; but should their policies fail, well, whosoever is disgruntled should go to “mpumulo wa bata” and make his or her case.

An interesting lot, aren’t they?

What, against, the above are the consumers saying?

Making his observations on the government’s position, especially in the light of President Banda’s responses on the radio programme, John Kapito said the responses that President Joyce Banda gave on exchange rate management on December 31, 2012 confirmed his worst fears.

He is convinced that her advisors have misled her, in a big way, on the issue. Again, according to Kapito it was also clear from the president’s responses that she just accepted what international donors told her to do on the kwacha exchange rate without understanding its implications on consumers.

“I listened to the programme and her arguments religiously and I have now started feeling sorry for her because she had no idea what she was talking about,” said Kapito.

Kapito: Cama boss

According to Kapito, the president’s response was based on misinformation as no one has demanded that the kwacha should be fixed again as the president suggested.

“We are not asking the government to fix the kwacha. We just want them to start managing it instead of leaving it completely to market forces,” said Kapito.

He said what the president has not been told is that she could have achieved the intended objectives by either just devaluing the kwacha or floating it instead of doing the two things together.

He said it was a big goof on the part of the government to

1) devalue the kwacha by 49 percent and

2) then float it at the same time.

“Why did they devalue and float it at the same? Why couldn’t they just devalue it or just float it? The free fall of the Malawi kwacha has come about because of the combination of both devaluation and floatation,” claimed Kapito. (These questions can best be answered by Charles Chuka.)

He said government should have both devalued the kwacha and let the Reserve Bank of Malawi continue managing it or liberalise it but under a managed float as Malawi’s economy is not mature enough to handle a completely free-moving currency.

“An economy like Malawi’s which has no reserves to support its currency cannot afford a free-floating currency because doing so subjects it to speculation from greedy traders who deliberately withhold forex to make a killing out of increasing exchange rates,” said Kapito.

He said while fixing of the currency is not a good option, a managed float would be appropriate for Malawi adding that this was not a new concept in Malawi as it has successfully been implemented before even under a programme with the International Monetary Fund.

“The president should not be misled that the IMF would be angry if we opted for a managed, not a fixed, exchange rate. It all depends on how you negotiated with them,” said Kapito.

“It’s up to her to get the right information from independent people as that is important not only for the people that are suffering because of her decisions but also for her own political future. Our advice can help her win the elections in 2014,” said Kapito.

He said as things are going now, the president would be in for a shock during the election in 2014 because of poor advice she was getting. He finished by emphasizing that Cama is at her disposal to help her understand the whole issue so that she is able to make informed decisions on the matter.

Question time: Who is right – and indeed – who will have the laugh last?

The consumers, who are essentially the electorate, will on May 19, 2014 pass judgment. Whether they will go out on the streets en masse or not on January 17, should at this point not be used as a yardstick for the success or failure of the floatation policy by any one.

But one thing is certain: if President Banda changed her mind today and incorporated John Kapito and Cama’s ideas, the same “Charles Chukas” and “Ken Lipengas” would swear on the Holy Bible that, that is the best course for Malawi.

Are these people public servants or mercenaries, they never cease to amaze me.